Skip to main content

tv   Nancy Grace  HLN  October 5, 2009 3:00am-4:00am EDT

3:00 am
reserve was dismal. in every case, it all the actions that were initiated in congress. that is true with sub from mortgages. -- subpar mortgages. the fact is, if you look at the current arrangement of power, involving consumer protection, in terms of mortgages, in terms of credit cards, in terms of overdraft, the largest single agency in the bank regulatory field is the federal reserve. . . federal reserve and those who resist taking consumer protection powers and putting them into a separate agency are
3:01 am
defacto the greatest reserves of power now around because we have a consensus on believe, some details might be debated, we have consensus lending powers under 13 through ã%@ 'rr'b$brri but we do object to and strenuously think would be a mistake is when you do with consumer protection and that is vested in a new government agency and give it tremendous
3:02 am
power not only to protect consumers but also give it power to design financial products. you give it the power to dictate terms of financial agreements. you give it power to limit twice, give it power to restrict competition, and by giving it the power to approve new products, you completely stifle innovation and america didn't get to be the largest economy in the world three times bigger than the next biggest economy by taking away individual choice, stifling innovation and by putting government in the business of managing financial services and making choices for both institutions and individuals, so i am sorry that we have had a miscommunication.
3:03 am
but our objection is that you have a of responsibility from individuals and institutions to the government. we also object and chairman bernanke, we have strenuously objected to something else, and that is investing in the federal reserve the right to bail out individual non-bank financial institutions. we believe that the fdic has the power to resolve banks through their statutory authority, but we think that is to protect depositors and not to protect the bank, its shareholders or to protect it from risky investors.
3:04 am
in the remaining time i have left let me tell you something else we have great unease about. i believe it was march of last year, not september, i had conversations with you and secretary paulson, and at that time you aptly expressed tremendous concern about the over extension of debt and leverage and i think there was a real concern on the part of a lot of people whether this deleveraging and construction of debt can be done in an orderly way. so there was some warning of what we saw in september i think starting with bear stearns. but i am not sure that even on till this very day we have identified exactly what caused the defense of last year and how to address it.
3:05 am
instead, we have had with almost light speed the obama administration proposed a sweeping change in financial regulation, which includes and continues to include the possibility that the treasury would spend a trillion dollars to bailout and other non-bank financial the institution. former chairman volcker said he had extreme concern over fat. he felt like i was a mistake and we as republicans to come to back. we do not believe the government ought to be in the bailout business -- thank you, mr. chairman. >> the gentleman of north carolina is recognized. >> welcome back, german bernanke -- chairman bernanke.
3:06 am
i want to first expressed the light on the change of basic things related to the federal reserve under your chairmanship. i quite often tells the story that after being on this committee ever since i came to congress and seeing it have jurisdiction over the federal reserve not only did i not understand anything of the former chairman said in his testimony, but i couldn't tell my constituents where the federal reserve was located until you became the chairman of the federal reserve and invited a number of fuss over to a discussion with you. that in and of itself was an indication to me that there was a new day at the federal reserve and i would have to say that
3:07 am
since that time, they're has been an ongoing willingness to open the federal reserve from the mystique both the language and the appearance of the federal reserve had under the prior chair. and the actual operations of the federal reserve and in that connection i want to complement the witness, mr. alvarez, sitting behind you, you sent to the last hearing on the proposed bill mr. paul has authored regarding the audit of the federal reserve. i think we made substantial progress toward putting
3:08 am
information in a public record based on that hearing double both educate the public about what the federal reserve does and the changes that have been made in transparency and accountability at the federal reserve and what needs to be done legislatively as part of regulatory reform to memorialize that in legislation and i think we will come to a resolution that i am honored to say of the chair has given me the primary of 44 and my subcommittee, so i think we're going to work to a resolution of that. i hope we can also work through
3:09 am
a resolution in regulatory reform of this whole consumer protection issue because i think there are some things in your testimony this morning that when i get back to question you about will help us put that issue in perspective in a much more public and transparent way. so i welcome you back to this hearing and look forward to working with you on both the audit issue and on the consumer protection issue as well as the systemic risk and other issues we are trying to resolve during this regulatory debate. >> the gentleman from texas is
3:10 am
recognized. >> thank you mr. chairman. the media has been replete with one year anniversary stories of the historic bailouts or economic recovery actions by our federal government. before deciding how we best proceed with financial markets reform we would do well to learn the lessons of the good, the bad and the ugly. first the good within months of intervention there is no doubt the credit spreads return to more normal levels. equity markets have risen appreciably and the panic we felt last september has subsided. the bad, our economy continues to contract in the face of massive government intervention to much private capital remains on the sidelines. after the passage of the administration's $1.2 trillion stimulus bill, 3 million of the hour fellow countrymen lost their jobs and the nation suffers from the highest unemployment rate in the quarter century and i remind all there is no such thing as a jobless
3:11 am
recovery, no jobs, no recovery. now the ugly. this orgy of spending has brought our nation its first trillion dollar deficit and national debt will triple, triple in the next ten years. according to the special inspector general for the t.a.r.p. program, the taxpayer is on the hook for up to $23.7 trillion, or $202,940 per household. the government's continued bailout of fannie, freddie, chrysler, gm, the list goes on, hamper economic recovery and threatened to institutionalize us as a bailout nation with no visible exit strategy in sight. it remains a huge difference between having emergency liquidity to a panic financial system in bailing out individual monk firms fortunate enough to be designated to be too big to fail. under the latter policy the big get bigger small get smaller,
3:12 am
the taxpayer gets poor and children get saddled with the mother of all debt. clearly, there is a better way. reforms are needed but the best way to end taxpayer bailouts is to end taxpayer bailouts. >> the gentleman from new jersey is recognized for two minutes. >> i thank the aig chairman bernanke back again. i note in the chairman's testimony you continue to advocate the federal reserve should be given authority for consolidated oversight for all, quote, systemically important financial institutions, and quite candidly, i do have a number of concerns about this proposal many i expressed before among them specifically come specifically designated institutions as significantly -- systemically significantly years to competitive advantages, increased moral hazard and makes it more likely such institutions will be considered too big to fail. second, the federal reserve
3:13 am
already has consolidated supervision over the large banks holding companies including city and bank of america which federal government has put billions of dollars and due to the fact consolidated supervision apparently failed in the past. furthermore, fed policy itself, that is keeping interest rates too low for too long, primarily before you were here, was one of the major factors leading to this crisis. i am not alone with my concerns about the fed as a systemic regulator. there seems to be universal distaste on such a role in the senate banking committee and political reality what seemed to make it less likely the house what comfort such new power on the fed either. as has been stated previously rather than give additional power republicans on the committee have proposed as part of the reform plan the power of the fed to be focused primarily on monetary policy and others to. so preventing future tax payer funded bailout is an aim of the people and and of a piece of legislation i plan to introduce
3:14 am
later today i will call for raising the minimum downpayment for the fha loans as well as a study to examine what is inappropriate leverage ratio for the fha. there has been increasing reports of a likely necessity of a tax payer funded bailout for the fha and this legislation aims -- >> the gentleman's time is expired. >> -- i appreciate your time on that. >> i want to begin with issues of history raised. the gentleman from texas listed the bailout he has found damaging, for any mae, freddie mac, aig, automobile companies, all of which work by the bush administration, and i do think it is appropriate to note the obama administration inherited all of these and carried some out more or less in a number of cases. but every single one of those was initiated by the bush administration. suggesting it wasn't part of an ideological agenda but in reality and indeed much of what
3:15 am
we talk about today we articulated by secretary paulson in april of 2008, so that doesn't make them right or wrong -- >> mr. chairman, your time is expired. if you ought to give additional -- >> excuse me, in my five minutes. >> how about an opening statement -- >> i apologize. you are quite right. audible take whatever time i used in that opening statement deducted from my five minutes and the chairman is recognized. >> thank you. chairman frank, ranking member bachus and other members of the committee i appreciate the opportunity to discuss ways of improving the regulatory framework to better protect@@@@v
3:16 am
potential systemic risks. to further encourage a more comprehensive holistic approach to financial oversight, all federal financial supervisors of regulators on just federal reserve, should be directed and in power to take account of the risk to the broader financial system as part of their normal oversight responsibilities. third, a new special resolution process should be created that would allow the government to wind down a failing system ackley important and angela institutions whose disorderly collapse would pose substantial risk to the financial system and broader economy. importantly, this regime to allow the government to impose losses on shareholders and creditors of the firm. fourth, all system ackley important payment clearing
3:17 am
settlement of arrangements should be subject to consistent and robust oversight standards. fifth, policy makers should ensure consumers are protected from unfair and deceptive practices in their financial dealings. taken together these changes should significantly improve regulatory system's ability to constrain the buildup systemic risks as well as financial systems resiliency when a serious adverse shocks occur. the current financial crisis shows risks can arise not only in the banking sector but also activities of other financial firms such as investment banks or insurance companies that traditionally have not been subject to the regulation and consolidated supervision applicable to bank holding companies. to close this important gap in the regulatory structure, legislative action is needed that would subject all systemically important financial institutions to the same framework for consolidated supervision that currently applies to bankholding companies. such action would prevent
3:18 am
financial firms that do not own a bank that none the less oppose risk to the overall financial system because the size, risk or interconnectedness of their financial activities from of waiting country inns of supervisory oversight. besides being supervised on a consolidated basis systemically important financial constitutions should also be subject to enhance regulation supervision including capital liquidity and risk management requirements that reflect the institutions important role in the financial sector. enhanced requirements are needed not only to protect stability of individual institutions and financial system as a whole, but also to reduce incentives for financial firms to become large in order to be perceived as too big to fail. this perception materially weakens incentive of creditors of the firm to restrain the firm's risk taking and creates a plea in field tilted against smaller firms not perceived as having the same degree of government support.
3:19 am
creation of a mechanism for the resolution of system ackley important on big financial firms which i will discuss later is an important additional tool for addressing the two big to fail problem. the federal reserve is already the consolidated supervisor of the largest most complex institutions of the world. i believe the expertise we've developed in supervising a large diversified interconnected banking organizations together with a broad knowledge of the financial markets which these organizations operate makes the federal reserve well suited to serve as a consolidated supervisor for the was systemically important financial and institutions that may already be subject to the bank holding company act. in addition, our involvement supervision is critical for ensuring we have the expertise, information and authority to carry out a were eight essential functions of the central bank of providing financial stability and making effective monetary policy. federal reserve has already taken important steps to improve its regulation and supervision of large financial groups building what lessons from the current crisis.
3:20 am
on the regulatory side we played a key role in developing the recently announced internationally agreed improvements to the capitol requirements for training activities and securitization exposure and continue to work with other regulators to strengthen the requirements for other types of on and off balance sheet exposures. in addition we are working with phil regulatory agencies were double the of capital standards and of the supervisory tools that would become agreed to the systemic importance of the firm. options under consideration in this area include requiring system ackley important institutions to hold aggregate levels of capital of current regulatory norms or maintain a greater share of capital in the form of common equity or instruments with similar laws absorbent attributes such as contingent capital that, first equity when necessary to mitigate systemic risk. the financial crisis also highlighted weaknesses and liquidity risk management at major financial institutions including over reliance on short-term funding.
3:21 am
to address these issues the federal reserve lead the development of international principles for some of liquidity risk management which had been incorporated into interagency guidance now out for public comment. in the supervisory every other recently completed supervised capital assessment program properly known as the stress test was instructive for our efforts to strengthen oversight of the largest banking organizations. this unprecedented interagency process led by the federal reserve incorporated forward-looking cross from aggregate analyses of 19 of the largest bank holding companies which together control a majority of assets and loans within the u.s. banking system. drongen on the experience with increased emphasis on the horizontal examinations which focus on a particular resource activities across a group of banking organizations. and we have broadened the scope of the resources we bring to bear on these reviews. we are also in the process of creating enhanced quality of
3:22 am
surveillance program for a large complex organizations that will use supervisory information, from specific data analysis and market based indicators to identify risks to specific firms as well as industry as a whole. this work will be performed by a multidisciplinary group composed of economic market researchers supervisors, market operations specialists and other experts within the federal reserve system. periodic scenario analysis will be used to enhance understanding of consequences of changes in the economic environment for both individual firms and the broad system. finally come to support complement these initiatives, we are working with the other federal banking agency to develop a more comprehensive information reporting requirements for the largest firms. for purposes of the effectiveness and accountability the consolidated supervision of an individual firm whether or not it is systemically important is best best with a single agency. however the broader task of monitoring and addressing systemic risks that might arise
3:23 am
from interaction of different types of financial institutions and markets but regulated and unregulated makes seed the capacity of any individual supervisor. instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole. this objective can be accomplished by modifying the gentry architecture and two important ways; first, oversight council composed of representatives of the agencies and departments involved in the oversight of the financial sector should be established to monitor and identify emerging system occurs across the full range of financial and institutions and markets. it sells such potential risks include rising correlated risk exposure across firms and markets significant increase in leverage the could result in fragility, and caps that review of recovery edge that a rise in the course of the financial change and innovation including development of practices, product and institutions.
3:24 am
a council could also please roles and cord meeting responses by member agencies to mitigate systemic risks and recommending actions to reduce person clich alladi practices and identifying firms that may preserve designation as systemically important. to fulfill the responsibilities a council would need access to a broad range of information from its member agencies regarding the institutions and market supervised. when the necessary information is not available through that source they should have the authority to protect such information directly from financial institutions and markets. second, congress should support reorientations individual mandates to include not only the responsibility to oversee the individual firms or markets within each agencies scope of authority but also their responsibility to try to identify and respond to the risks those entities nato was either individually or through their interactions with other firms or markets to the financial system more broadly.
3:25 am
these actions can be taken by financial supervisors on their own initiative or based on the request or recommendation of the oversight council. importantly each supervisor's participation of the oversight council would greatly strengthen the supervisors ability to see and understand emerging risks to financial stability. at the same time, this type of approach would test the agency that has responsibility and accountability for the relevant firms or markets with authority for developing and implementing effective teamwork responses to system threats arising within their purview. to maximize effectiveness the oversight council could help coordinate responses when risks across rebel tory boundaries as would often be the case. the federal reserve already has begun to incorporate systemically focused perched the supervision of large interconnected firms. doing so requires we go beyond considering each institution in isolation and pay careful attention to internal linkages and inter dependencies among firms and markets that could
3:26 am
threaten the financial system in a crisis for example of failure may lead to runs by wholesale vendors of other firms to seen by investors as similarly situated or that have exposure to the failing firm. these efforts are reflected for example in the expansion of a horizontal reviews and quantitative surveillance program that i discussed earlier. another critical element of systemic risk agenda is creation of the regime that allows the orderly resolution of failing systemically important financial firms. in most cases the federal bankruptcy law is provide appropriate framework for the resolution of non-bank financial institutions. however, the bankruptcy code does not sufficiently protect the public's strong interest and insuring or early resolution of a non-bank financial firms failure would pose substantial risks to the system and to the economy. indeed, after the lehman brothers and aig experiences, there is little doubt we need a third option between the choices
3:27 am
of bankruptcy and bailout for those firms. a new resolution regime for nonbanks analogous to the regime used by the fdic for banks would provide the government the tools to restructure or why down systemically important firm in a way that mitigates the risk to financial stability and economy and protect the public interest. it also would provide government a mechanism for imposing losses on the shareholders and creditors of the firm. establishing a credible process these for imposing such losses is essential to restoring a meaningful degree of market discipline and addressing be too big to fail problem. the availability of a workable resolution regime would replace the need for the federal reserve to use its emergency authority under section 14 for 3 of the federal reserve act to prevent the failure of specific institutions. payment clearing settlement regions are the foundation of the nation's financial infrastructure to read these arrangements include a
3:28 am
centralized market place for clearing and settling payment securities and derivative transactions as well as specialist activities to which financial institutions clear and settle such transactions bilaterally with. one of these arrangements can create sufficient scenes and promote transparency in the markets they also make concentrate substantial credit liquidity and operational risks and absent strong risk controls made themselves be a source of contingent in times of stress. unfortunately the current the gil troy supervisory framework for system ackley important payment clearing settlement arrangements is fragmented creating potential for inconsistent standards to be adopted or applied. under the current system no single regulator is able to develop a comprehensive understanding of the interdependence these risks and risk management approaches across the full range of arrangements surfing the financial markets today. in light of increasing integration of the financial markets it is important systemically critical payment clearing settlement arrangements be viewed from a system wide perspective and be subject to
3:29 am
strong consistent provincial standards and supervisory oversight. we believe additional authorities are needed to achieve these goals. as the congress considers financial reform is vitally important consumers be protected from unfair and deceptive practices and their financial dealings. strong consumer protection helps preserve household savings, promote confidence in financial institutions and markets and as matteo really to the strength of the financial system. we of seen in this crisis stalled or inappropriate financial instruments can lead to bad results for families and for the stability of the financial sector. in addition the playing field is not even regarding extension and enforcement of consumer protection laws among the banks and non-bank affiliates of holding companies on the one hand and firms not affiliated with banks on the other. addressing this discrepancy is critical both for protecting consumers and for ensuring fair competition in the market for consumer financial products.
3:30 am
mr. chairman, ranking members, thank you again for the opportunity to testify these important matters. the federal reserve looks forward to working with the congress and administration to enact meaningful regulatory reform that will strengthen the financial system and reduce both probability and severity of futurekw but we do want to note that every item that the gentleman from texas mentioned as a regrettable bailout was
3:31 am
initiated by president bush and his advisers carry on bye president of, our job is to try to prevent this we think from happening again. one of your historical reference i want to make to the chairman, and i think it is fair to build again as we are trying to get bipartisan mr. sherman has been a high economic official first point by president bush to a couple of possessions and now by president obama has been reference to the economic recovery plan and it was noted that what seemed simplistic economics the plan was passed but unemployment went up, the assumption that the plan could pass constantly on do things that had been built into the economy seems questionable, but i would like as you said before, what is your estimate of the employment impact of the economic recovery plan passed this year, mr. chairman? >> mr. chairman, i don't have an immediate number for you. part of the issue here is i
3:32 am
think about 20% of the monies that were appropriated have been put in the system so it remains to be seen with the net effect will be. the estimated impact is difficult one because you have to compare what would have been the absence. of course that's difficult. i do believe fiscal policy can have positive effect on growth and employment based on large literature looking at previous episodes. the effect on consumer spending, state and local spending and the like but i would have to concede that at this point again because it is early in the process and difficult to assess -- >> the report did mention a number of areas you thought it had positive impact. >> yes, based on our analysis largely reflects studies of previous episodes, there is a presumption that we salles for example in the last -- in the
3:33 am
early 2,000's consumers did respond to income transfers by increasing spending over a period of time -- >> what me move on then. i appreciate that, and we do have more to be spent, because i want to respond to the ranking member's denial of my assertion that the republicans want to leave for consumer power to the federal reserve. yes, they do. the proposal to create takes more power than from any other agency and it is to leave power where they are and perhaps enhanced enforcement. as of the largest defense resisting federal research power that we now have is coming from those who propose agency. the gentleman from alabama said he objected to other things which are not in the bill we circulated last week. we are not talking about doing some of those things. they were interpretations we have already substantially rewritten to talk about what we are talking about. but again,, the position that
3:34 am
the republicans have talked about as i understand is to believe consumer protection with the bank regulatory agencies not to separate as the safety and soundness from consumer protection of the bank regulatory agencies. the fdic, control of the currency, thrift supervision and federal reserve board consumer protection statutes are lodged in the federal reserve than anywhere else and if you preserve the status quo of all of the federal agencies. i think that is a mistake and that is why we have talked about, we have proposed a change if there is a proposal to diminish the large repository federal reserve consumer power i haven't seen it yet and i would
3:35 am
look forward to it. the notion even of a council proposed by the witnesses the other day, it would be a council of existing federal regulators and he said they would reserve -- they would retain their power so that is where we are. the gentleman from alabama. >> thank you. jarman bernanke i guess you didn't know you're being invited to a debate between the chairman and point i would like to get back to your testimony. but i think as you know, what the republicans have proposed is consolidating financial regulation within a single agency and not bifurcating safety and soundness from consumer protection. you actually in a letter to me july 29 agreed that bifurcation had tremendous risk. i think >> ; am i correct on that regard? >> there is enforcement to rule
3:36 am
writing. >> thank you. the chairman also, although i am not sure he has read our plan, what we proposed is very similar to what senator dodd and senator warner and the senate proposed in this consolidation of some of the bank supervision. now, chairman bernanke, as you have heard from mr. hensarling and others, we are deeply concerned over the obama administration's failure to abandon an option to use taxpayer money to bail out too big to fail non-bank financial institutions. i assure you are aware, or are you aware former chairman volcker expressed his strong concern for that also? do you share our concern that you do create, and i think
3:37 am
mr. garate said that moral hazard and also the question of fairness and i will end with this come to any questions that as you know you probably heard secretary geithner say he would not take a trolley in dollar intervention of the table. i would ask you maybe start with that and work back. would you -- would you endorse his statement? >> let me i think address the key issue which was raised by mr. hensarling. i do not in any way support to big to fail. i think it is a huge problem and whatever we do it must address that problem. big companies must be allowed to fail but they must be allowed to fail safely so they don't bring down the system. so i see the resolution regime example having three objectives objective number one is to avoid damage to the collateral damage of the broad system and that reason some flexibility is needed for the treasury or whoever is running that to bridge to a new company or take whatever actions are needed to intervene at that point but
3:38 am
there are other objectives. the second is to get rid of too big to fail and for that purpose i think the ability to wind down the firm should be there and i feel we ought to make it a strong presumption that whenever there is an intervention not only shareholders but also creditors lose money and that will create a market discipline that will take away the biggest advantage of being too big to fail. the third objective is to protect taxpayers and i want to express strong we i do not support a government or taxpayer investments alves t.a.r.p. as a means of preventing these failures. what i proposed something similar to what we have now to the fdic even if there are short-term extensions of credit from the government ultimately the full cost would be borne either by the creditors of the company or by the rest of the industry. i do very much want to address your concerns at the same time
3:39 am
we need a system to avoid the kind of chaos lehman brothers still hasn't resolved. still enormous amount of money tied up and confusion and uncertainty about claims and that is because the bankruptcy process cannot deal with this in an orderly way. >> let me close by asking this consumer protection agency, the chairman said today when we were talking about pure vanilla products he said he's taken the of the board. "the new york times" in an editorial september 3rd said the agency still has the ability to create incentives that would encourage the provisions of plain vanilla product including charging reduced oversight fees to firms that offer simpler how loans. do you agree with the provision or the federal government would actually tax or charge fees if banks did not offer plain vanilla surfaces or plain vanilla products?
3:40 am
>> , i addressed this in an earlier testimony and the point i made is there was a case for the product by relates what behavioral economics says about the ability of consumers to deal with complicated process these were products. but i also said i think that the basic design of all to come from the firm and the agency should not be designing the product and also simplicity is denied the fielder it doesn't necessarily one-size-fits-all, some products may be simple and prayed for some but not all consumers. >> gentleman of pennsylvania. >> thank you mr. chairman and first may i take the opportunity to congratulate what i heard you determined you are not supportive of greater power for the federal reserve but prefer the council and systemic risk regulation. is that a reasonable conclusion? >> me there isn't a change.
3:41 am
i think there has been some misunderstanding we have never supported and the administration never supported a situation that the fed would be on trimble super regulator over the system that. the administration proposes a council and we support the council and think it has a valuable role to play and we think underneath the council each of the agencies including the fed and also sec and others should be looking at the systemic indications of their actions and working together through the council to look up the system so we have never objected. >> what are i interpret correctly or not congratulations. we are on the course to together something that can be accomplished. the only thing i didn't hear you talk about is a factor that came to our attention when we hold the hearings on general motors, ford and chrysler. the testimony was quite clear and including the foreign manufacturers they conclude if we allow chrysler to fail it
3:42 am
would cause systemic risk and bring down all the other automobile industries because the nature of their dealers and suppliers. and that was a major consideration with the congress did in a supporting the bailout of general motors. i heard you only talk about financial institutions in relationship to systemic risk. does that mean you see no other systemic risk in the system beyond the financial institutions or is it because that happens to be the flavor of the day and we should wait until there is a failure or systemic risk and other industries? >> no doubt the failure of the companies would have been disruptive particularly in the region, the areas where and when it is concentrated in that area and was particularly troublesome given the state of the general
3:43 am
economy when these decisions were made but i would draw strong distinction between financial institutions particularly large complex international interdependent financial institutions and any other kind of firm i think only the large financial institutions have the ability to bring down the entire global system so the failure lehman brothers affected the united states economy but a free economy in the world clearly the damage would have been done for other kinds of firms plywood personally my focus is on financial firms -- >> i understand that is your specialty and focus but are you having some one do and always is to find out whether we should worry about the world energy problem? or transportation particularly aircraft where we have limited manufactures and what would happen to the bald if there were a failure on one of those industries? is that something we should think about or worry about? >> we should think about, but if we look at the airline industry every major airline has been through bankruptcy at one point or another and it's been a process -- i'm probably more
3:44 am
worried about the manufacturers of the airlines and the operators. i realize they are a few left and if there were failures it could be i would think systemic. >> there are tough questions there but it's not just question specialization, i think unfortunately financial crises, booms and busts are a longstanding problem of capitalism and i think they have a special role. >> i agree that being the case are you planning to come forth with a proposal to the congress of how not only we can have this estimate regulator that can identify too large to fail but how we start winding them down or preventing them from getting that large, are we going to go into an industrial plan or financial plan in america where we once identify where we establish a way of taking these institutions down to a
3:45 am
controllable size where their failure would not cause systemic risk? >> i don't think it is possible to reduce all financial institutions to a size so small they would not be systemic consequences and without losing very substantial benefits of very substantial benefits of international financial flow for %,#7@ @ @ @ @ @ @ @) shrink. the gentleman from texas. >> thank you, mr. jarman. churn and bernanke, yesterday we
3:46 am
had a hearing in the kennedy on d.c. yes p.a. many of us feel as a financial service product approval agency. the language we have seen from the chairman still allow the agency to have sweeping draconian power to outlaw financial products that it believes to be, quote on quote, unfair or abusive, again fairly subjective terms. as a part of that hearing, and we heard testimony from u.s. chamber of commerce they submitted a study they did and let me quote from that the cfpa credit squeeze would result in closure pure startup and slower growth. this would cost a significant number of jobs that would either be lost or not created, and of quote. as you have reviewed the cfpa either through the
3:47 am
administration's paper or to the extent you have knowledge of the chairman's bill, could the cfpa indeed lead to further job losses or did the chamber of commerce just get it wrong? >> i think would depend on the execution. two comments. first is the federal reserve in the consumer regulation works within the statutory context, the same sort of law, tisa and others that define the parameters and we do things in the context of congress has told us the appropriate of objectives and constraints so that is how we operate. i think there should be a statutory context for whatever agency is making those decisions. it is always the case making specific decisions about trying to balance the benefits of protecting consumers versus the cost of restraining credit availability and i speak for the federal reserve which is in our efforts we have brought together not only lawyers and experts on
3:48 am
the minutia of consumer level we try to bring economists and financial people and so on to try to look at the full implications for the credit markets decisions taken and i would say the important agency to take that view as well and one mechanism i think is the board and other agencies which i believe is the plan. >> is the summary of that answer >> it depends -- >> we will turn it into a two word answer, it depends. would you move along with the amount of time i have left. you are familiar with the incredible financial cannot but of the taxpayer to the government sponsored enterprise as fannie mae, freddie mac. i believe the fed has purchased roughly $130 billion of their debt another roughly $700 billion of their nbs and
3:49 am
the treasury is up to 100 billion so we are looking at almost a trillion dollars of tax payer commitment. the legislation the administration and the democratic majority has brought before us is almost silent on the issue of reform for the gse. the legislation before us will apparently regulate pawnshops and payday lenders to the best of my knowledge they had no role in our economic turmoil many economists believe fannie and freddie were central to our economic turmoil. i don't believe pawnshops and paid a lenders have taken any taxpayer funds and now we are looking at almost a trillion dollar commitment. in your testimony you said that durham reform, any reform agenda should include f least five key elements. if our reform agenda a silent on reforming freddie and fannie did we meet your test?
3:50 am
>> i think in the near future we need a plan for friday and fannie. i didn't include that because i was focused recently on the fed's proposal and risk aspects that you are absolutely right, gse is need to be addressed in the near term not just for systemic risk reasons but we have on uncertainty about housing and what is going to happen to the housing structure, housing finance system. so i hope that in the near future, and i believe that is the intention, i hope in the near future we have some proposals on that. ..
3:51 am
intrusively ability of the central bank to help stabilize the system so of course you could have a central bank focused on monetary policy of saliba i thank you is very important for the first central bank two of information and the expertise in sight of banking system in order to both make the federal monetary policy had to be able to flager appropriator earl whenever there is a crisis. >> the gentleman's time has expired. the gentlelady from california. >> thank you very much. mr. bernanke, i am very pleased that you were here with us once again and i would like to thank you very much for your
3:52 am
responsiveness to the request that we have made to you several times, and the discussion that we had at the recent a elc that was sponsored by the congressional black caucus. i really do appreciate that and let me just say that i believe that the presentation that u.s.-made here this morning, where you discussed your agenda for reform and pointed out that five key elements make a lot of sense. i just want to ask about the oversight council. you talk about the oversight council being able to monitor and identify emerging wrists to financial stability across the entire financial system. and, i wonder taking a close
3:53 am
look at credit default swaps, naked credit default swaps in particular because i consider them a rest to the stability across the financial system and i am focused somewhat on the fact that the taxpayers in bailing out the aig had to pay for that gamble to goldman sachs and i don't know maybe some others. how would you deal with that, with this council? how would you see the potential for risk to the system that is presented by these transactions? >> i think that credit default swaps is a perfect example of the kind of thing the council may be focused on. this cbs market cut across so many different jurisdictions. aig was under the office of thrift supervision.
3:54 am
some of the clearing mechanisms were not regulated at all. the new york fed was trying informally to get them working better. you had the fcc and the cftc involved in that process to some extent. partly was an issue of bank regulation because banks were also involved in these transactions and labor not adequately capitalized to do that, so it is a classic example of something that went across a whole bunch of different areas in which no one regulator had a holistic view of what was going on and i think this would be a really good example of how by sitting together in a serious way and having a staff and rereviewing development issues, new instruments, new markets and so on this is the kind of thing we are working together might have been a course for human beings won't be in fallable but it would have been a better chance of identifying it earlier in this kind of council context
3:55 am
then in the system we currently have. >> as you know, i do not share the opinion of many who work in this whole financial services industry about regulation of any product that comes on the market. i believe that there are some products that are just too risky and should be eliminated. they just should not be there. have you ever thought about how perhaps we could identify such risk and say this just can't work? we just can't do this? >> the federal reserve has taken this position and we for a very long time the fed was focused on transparency and disclosures on the theory that if people could read the information that they would make good decisions, but for example in the recent credit card work, which became the basis for a lot of the legislation here we identified
3:56 am
through consumer testing and other kinds of means that there were a number of practices and products and so on that did not benefit the consumer and which could not reasonably be understood by typically educated consumers to understand the full implications of what the practice was and based on that we said in some cases transparency is not enough and we employed the unfair and deceptive acts and practices provisions simply to ban the practice is so i think in situations where they are no benefits to the consumer and where disclosures are not adequate there is grounds for-- and the consumer agency would look at that and the council would look at those things. >> i am very pleased to hear that and i thank you very much and i yield back the balance of my time. >> the gentleman from california. >> thank you chairman bernanke. less month the federal housing
3:57 am
it administration of knowledge that a new-- found the fha's cash reserve fund is rapidly depleting. it might drop below the congressional in mandated 2% by the end of the year, and so the leverage their, their ratio is 50 to one for fha, and it will soon have a smaller capital cushion them bear stearns had on the eve of its crash. f 50 to one is half were fannie mae and freddie mac were and 100 to one leverage ratio and the delinquency rate for the fha is now above 14% so that is about three times higher than on conventional mortgages. in many respects the reason for this financial deterioration is that fha is underwriting record numbers of high risk mortgages.
3:58 am
between 2006 and the end of next year fha's insurance portfolio will have expanded to 1 trillion from about 410 billion. the fha's i would say absurdly low 3.5 down payment policy in combination with other policies to reduce upfront costs for new homebuyers means that the homebuyers could move into their government insured home with an equity stake of about 2.5%. in essence the private market for loans with little or no money down has shifted on the books of the federal government. are you concerned with the long-term consequences of this trend and the rapidly deteriorating capital cushion of the fha and are you confident this law not turn into another fannie/freddie situation which could have been easily prevented. as we listen to the fed in 2004 and 2005 but then up costing taxpayers billions of dollars?
3:59 am
i remember when the fed came to us in 2004 and said we need to be able to regulate for systemic risk. deleverages 100 to one. basically what you are doing in government is that the congress has forced into a position where half the portfolio has to be sub-prime and this represents a systemic risk. we need the ability over for the regulators to slowly bring down this overleveraging and bring down the portfolio size by giving us the ability to regulate for systemic risk. are you worried that we are going through that kind of a cycle again here? >> i should say first that we don't directly evaluate the fha position and they disagree somewhat with the southside view so i won't try to adjudicate between that but it is true of the de facto has replaced the riskier part of tor

108 Views

info Stream Only

Uploaded by TV Archive on